CHICAGO - Chicago Mayor Rahm Emanuel and his finance team can expect some tough questions from the buyside Friday at the city's annual investor conference.
Emanuel launched the conference after he took first took office in 2011. This year it offers the buyside and other municipal market participants the chance to dig deeper into Emanuel's proposed 2016 budget and his revenue-side solution to the city's massively underfunded pensions: a record property tax hike.
At stake is the city's ability to convince investors who demand steep interest rate penalties to buy Chicago paper that it is turning the corner toward stabilizing its credit, which Moody's Investors Service dropped to junk in May.
The conference - closed to public and press -- offers investors direct access to both city and Chicago Public Schools leaders to answer their questions.
They have plenty.
"The governor has had a different approach on property taxes, so how is this going to work?" said Howard Cure, director of municipal research at Evercore Wealth Management LLC, referring to Gov. Bruce Rauner's push to freeze local property taxes.
While Chicago enjoys home rule status and doesn't fall under existing state tax caps, the city's budget plan relies on several pieces of state legislation to ease the rate it is required to increase its public safety pension contributions and to increase a homestead exemption to limit the impact of the property tax hike.
The buyside, other analysts, and watchdog groups have offered a broad endorsement for the plan saying it finally shows a willingness for the city to raise revenue to deal with its budget problems.
Emanuel, who was re-elected this spring, has not previously raised the city's property, sales, or gasoline taxes. The city's steep yield penalties have eased by 10 to 15 basis points since the plan's announcement Tuesday, on top of a 10- to 20-point narrowing of spreads earlier in the month when word began to circulate that a big tax hike loomed.
But the market's endorsement is tempered with concerns that the plan isn't a cure-all and faces legal and political uncertainties.
Emanuel wants to phase in over four years - beginning with an adjustment in the 2015 levy - property tax rate increases that will end up bringing in an additional $543 million annually by 2018 to cover escalating contributions required under a 2010 state mandate to stabilize the city's firefighters and police funds.
"I'm of the opinion that the market has hung in with Chicago because of its economic depth, but it needed to show that they have a willingness and this increase does show a willingness to step up to the plate," said Richard Ciccarone, president of Merritt Research Services, who added he prefers Emanuel's approach of ratcheting up the property tax instead of increasing the rates it all at once.
Still, Ciccarone agrees with those who believe what Emanuel has offered won't fully solve the city's pension challenges and he has questions he'd like answered Friday about how the city will face that problem, while also looking for more detail on what has been presented.
The $7.8 billion budget captures $170 million in savings through reforms and other efficiencies with no service cuts and raises another $125 million through new and higher non-property taxes and fees to help erase a $233 million operating budget gap and help cover rising payments for its municipal and laborers pension funds and to chip away at the amount of debt service it's been pushing off annually.
"You can't solve the city's problems solely on the revenue side," Cure said, so he wants to hear more as how the city plans to curb spending growth and deal with future pension cost growth.
"It shouldn't be a one-way street," he said.
More has to be done to extract savings on the expense and personnel side, Ciccarone said. "I think the unions have to realize that."
While the Illinois Supreme Court's May ruling voiding state pension cuts as unconstitutional has made that road much tougher, the city could press harder to get unions to agree to other salary and non-pension benefit changes to squeeze out savings.
Core services should also be on the table, Ciccarone said.
With public safety making up a big chunk of the city's personnel costs, Ciccarone acknowledges Emanuel is in a tough position given the spotlight on city crime and violence.
"It's a delicate situation," he said.
The level of optimism among analysts and the buyside ranges.
The proposal "serves as a clear demonstration the mayor is willing to make the politically difficult decisions to put the city of Chicago's finances back on track," said one investor analyst.
"As long as this budget gets implemented, and the city stays disciplined with its commitment to phase out budget gimmicks, there is no reason the market shouldn't treat the city as an investment-grade credit again in coming years," the analyst said.
"The budget plan at least acknowledges the reality of Chicago's financial situation as opposed to kicking the can further down the road," said Thomas Schuette, co-head of credit research at Gurtin Fixed Income Management, LLC. "While the mayor's plan is an improvement if it is ultimately implemented, we also believe the scope of the city's problems is large enough that additional work will need to be done."
Schuette adds that the plan itself has a long way to go.
"This is still a plan that has many moving parts and will require significant political capital from the administration to get it passed," he said.
While attention has focused on the city government this week, the Chicago Public Schools' fiscal crisis looms large and the district's leadership also will make presentations at the conference.
The school board, whose members are appointed by Emanuel, recently passed a $6.4 billion budget that relies on $480 million in state pension help but has made little headway with state leaders. The district carries junk level ratings from Fitch, Moody's, and Standard & Poor's and has warned of thousands of layoffs and more borrowing if the state doesn't come through.
Schuette said the district's problems complicate the city's situation because city budget negotiations will take place "against a backdrop of Chicago Public Schools' financial crisis, which will require unpalatable political choices."
The city's position is also further complicated by Cook County's pension woes and the state's fiscal struggles. Cook recently raised its sales tax and the state is expected to look to an income tax hike to help cut a $4 billion to $5 billion deficit if state leaders can put aside their political differences and settle on a fiscal 2016 budget, which is already three months late.